Market participants may be sitting on the edge of their seats today in anticipation of the outcome of the FOMC gathering. Expectations are for the committee to begin tapering its QE purchases and the pace to be $20 billion per month.
Thus, if this is the case, all the attention is likely to fall to the statement accompanying the decision and Chair Powell's press conference for any comments on inflation and any hints regarding interest rates.
The Fed Is Expected to Taper, but What About Rates?
The US dollar traded higher against all the other major currencies on Tuesday and during the Asian session Wednesday, gaining the most versus NZD AUD, and CHF. The currency that lost the slightest ground was JPY.
The broader strength of the US dollar and the excellent performance of the yen, combined with the fact that the Kiwi and the Aussie were the main losers, suggests that markets may have turned to risk-off at some point yesterday or today in Asia.
Indeed, this happened during the Asian session today. European shares were mixed yesterday, while Wall Street hit fresh record highs once again.
Today, in Asia, besides Japan's Nikkei, which stayed closed, all the other indices under our radar slid, and this may have been due to investors turning cautious ahead of the FOMC decision later in the day.
Uncertainty still surrounds China's economic outlook and that nation's property sector, due to which Asian equities have been underperforming their EU and US counterparts recently.
Today, all the market attention is likely to fall on the FOMC decision, scheduled for later in the afternoon. When they last met, US policymakers kept their policy untouched. The statement accompanying the decision said,
"If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted."
What's more, the new "dot plot" pointed to 9 members in favor of rate increases to start next year and 17 supporting higher rates in 2023. Remember that back in June, the respective numbers were 7 and 13.
Since the latest gathering, several policymakers have been adding fuel to expectations over a November tapering start, while the better-than-expected earnings results suggested that the US economy was not affected by the latest bottlenecks as many may have believed.
This, combined with the fact that inflation continued to accelerate in September, well above Fed's objective of 2%, allowed market participants to consider a tapering start at this meeting as a done deal and bring forth their bets regarding the first interest rate hike.
According to the Fed funds futures yields, they are now nearly fully pricing in a 25 bps hike to be delivered in September 2022, while a few weeks ago, such a move was expected in the first months of 2023.
So, with all that in mind, we do expect the committee to begin tapering this week, and bearing that at the previous press conference, Chair Powell noted that a gradual tapering process could conclude around the middle of next year, we expect a pace of $20 billion per month.
Given that tapering is primarily anticipated by the financial community, all the attention is likely to fall on the statement accompanying the decision at Powell's press conference.
Anything suggesting that inflation could stay elevated longer than anticipated and that interest rates could start rising soon after the tapering could support the US dollar. The opposite may be true in case policymakers try to push back against interest-rate pricing.
Now the big question is: How the equity market will react? Will it slide on signals of faster rate hikes, which could hurt firms' profitability, or will it rise as this would mean that the US economy is performing better than many may have recently feared due to the latest supply shortages? In our view, although the former has been the case in the past, we believe that lately, it's been the latter.
Thus, anything suggesting that the Fed is confident of withdrawing monetary policy support following a start today may allow equity investors to buy more. After all, they may have already digested the idea that interest rates will start rising at some point soon.
USD/CAD – Technical Outlook
USD/CAD inched higher yesterday, breaking above the downside resistance line drawn from the high of Sept. 20. In our view, this move canceled the bearish case but has not signaled a bullish reversal yet. We will start examining that upon a break above 1.2435. For now, we prefer to stay sidelined.
A clear break above 1.2435, marked by the high of Oct. 27, could come after a hawkish Fed today and confirm a forthcoming higher high.
Initially, the bulls may target the peak of Oct. 12, at 1.2500, the break or which may carry extensions towards the high of Oct. 8, at 1.2560. If the rate does not stop at that zone, we could see it climbing towards the high of Oct. 6, at 1.2650.
A dip below 1.2290, the low of Oct. 21 could rally the bears. This will confirm a forthcoming lower low on the daily chart and encourage the bears to push for the 1.2205 zones, marked by the inside swing high of Jun. 15, at 1.2205.
If they are unwilling to stop there, we may see them driving towards the 1.2155 barrier, which is the low of the day after, or towards the 1.2127 level, which provided support on June 14 and 15.
NASDAQ 100 – Technical Outlook
The Nasdaq 100 cash index kept climbing north yesterday, eventually hitting the 16000 zones. With no signs of weakness, we believe that the index may be poised to continue trending higher, as marked by the upside support line drawn from the low of Oct. 13.
With no prior highs and lows to mark new resistance barriers, we would expect a break above 16000, which means an entrance into uncharted territory, to open the path towards the following psychological figure, at around 16500, with a potential small break at around halfway, near 16250.
Now, to start examining the case of a decent correction to the downside, we would like to see a drop below the 15500 zones, marked by the inside swing high of Oct. 21.
The index will already be well below the aforementioned upside line and may slide towards the 15305 area, which provided support between Oct. 21 and 25.
If investors are not interested near that price, we could see the fall extending towards the 15050 or 14915 hurdles, marked by the low of Oct. 18 and the inside swing high of Oct. 11, respectively.
As for the Rest Today’s Events
During the early Asian session, we already got New Zealand's employment report for Q3. The unemployment rate declined by more than expected, while the employment change accelerated faster than thought.
Only the labor cost index fell short of matching its forecast, but still, it was higher than in Q2. In our view, those numbers paint a positive picture and add to the case of more interest-rate increases by the Reserve Bank of New Zealand (RBNZ) soon.
Later in the day, we have the final Markit services and composite PMIs for October from the UK and the US and the ISM non-manufacturing index for the month. The final Markit prints are expected to confirm their initial estimates, while the ISM index is anticipated to have increased to 62.1 from 61.9.
The ADP employment report is also coming out, and the forecast points to a slowdown to 400,000 from 568,000. With regards to the energy market, we have the EIA report on crude oil inventories for last week.
The forecast points to a 2.225 million barrels build after a 4.267 million increase the week before. However, bearing in mind that the API reported a 3.594mn barrels rise yesterday, we would consider the risks surrounding the EIA number as titled to the upside.
As for the speakers, besides Fed Chair Jerome Powell, who will hold a press conference after the FOMC decision, we will also hear from ECB President Christine Lagarde, ECB Executive Board member Frank Elderson and BoC Deputy Governor Toni Gravelle.